Investors Spurning REITs After 2.7% Q3 Loss

By Michael Aneiro

Investors have been souring on real-estate investment trusts, which just finished their worst quarter in two years, losing 2.7% while the S%P 500 gained 5.2%, as Robbie Whelan reports for the Wall Street Journal today. That loss is across the Dow Jones Equity All REIT Total Return index, which includes 147 publicly traded REITs across a variety of sectors. Which of those sectors did the worst last quarter? Residential mortgage REITs, naturally, which had an awful summer and ended the quarter down 8.3% as a group. From the story:

REITs, which pay little or no corporate income tax and usually pay steep dividends, are sensitive to rising interest rates because they depend on borrowed money to expand their businesses.

As a result, when borrowing costs rise, REITs get dinged twice: their cost of capital goes up, and their dividend payments become less appealing compared with other high-yielding investments. The average dividend yield for the Dow Jones REIT index stood at 3.78% for the third quarter, up from 3.52% the previous quarter and 3.38% a year earlier….

Investors have shied away from real-estate stocks even as broader equity markets have gained. Since rates began to rise this spring, fund flows to North American real-estate-industry mutual funds, excluding exchange-traded funds, have turned negative. Investors have pulled $728 million out of such funds since the week of May 15, while flows to all equity funds were $42.8 billion over the same period, according to Lipper data analyzed by Evercore Group.

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OCTOBER 9, 2013 1:22 P.M.

Ed wrote:

Many of the REIT CEF managers have let their discounts to NAV explode past -10% without sacrificing a penny of fee income to repurchase shares and reign in those discounts. Time those managers become more shareholder friendly and eat the same cooking as their customers. Kudos to Eaton Vance for repurchasing a number of shares of their buy-write CEFs.